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I wish to form a LLP in Texas whereby I only accept funds from sophisticated investors. Funds would be invested in higher yielding investment that is generally not available to ''smaller'' investors. Investors will have no say in how the money is invested.

Questions:

1) Do I need to register as a Reg D Rule 506 exemption?

2) Do I need to prepare a Private Offering Memorandum?

3) Can I raise an unlimited amount from an unlimited number of sophisticated investors?

4) The investment I am looking at is done in $10Million ''blocks'', do I need to form a new LLP for each, or can I just state that in my agreement that once $10M has been raised the oversubscribed investor would automatically be placed in the next block?

5) What documentation would I need to give the investor other than the original Agreement?

Asked on 4/26/02, 9:06 am

1 Answer from Attorneys

This private placement offering is governed by Rule 506. Since the offering is over 5 million dollars, you would have to limit the investors to no more than 35. You can make the offering to non-accredited investors who are defined as individuals who possess knowledge and experience in financial and business matters making them capable of evaluating the merits and risks of the prospective investment.

The best approach would be to make this offering only available to "accredited investors". You would still be limited to selling to no more than 35. However, this makes the level of disclosure materials required by SEC rulings less intensive. Accredited investors are defined in Rule 501. Essentially with respect to individual investors (as opposed to institutional firms) the simplest way an individual qualifies as accredited is if they have a net worth of 1 million plus. An individual is also classified as accredited if he/she has made income in excess of $200,000 in each of the last two years or has made in excess of $300,000 in each of the last two years in combination with a spouse.

It will be best for legal and practical reasons to treat each "10M block" as a distinct and separate Rule 506 offering. You will need to prepare a private placement memorandum and file a Form D with the SEC. Each state where an investor resides will have some reporting requirements that must be complied with. In my opinion you will need several documents to comply with Rule 506 and insure the success of your offering:

1. Private Placement Memorandum

2. Subscription Agreement

3. Purchaser Suitability Questionnaire

4. Form D and Blue Sky documents required by states

Please feel free to call me to discuss your proposed offering in more detail. I would be happy to arrange to meet with you at my Dallas office. ph. (972) 231-5500 or (800) 303-0720